06-16-2011
• The Economic Spy
Simply stated a credit-default swap, or CDS, is a way for the owner of an asset like a bond to buy an insurance policy to protect themselves in the event the issuer of that bond defaults.
But, because the CDS market is unregulated, there is $60 trillion of so in these instruments that are not only purchased by actual owners of the debt, but by speculators betting that the issuing entity will indeed go out of business.
When the economy was “good” and there was little incidence of company’s defaulting, banks sold and took in the premiums with what seemed to be very limited risk. Limited risk because the chance that the company or country issuing the debt would go under was somewhat remote.